A Review of the SC Education Lottery and the State's Use of Lottery Proceeds
December 2003

REPORT (PDF)     SUMMARY (PDF)

Members of the General Assembly requested the Legislative Audit Council to conduct an audit of the South Carolina Education Lottery (SCEL). We reviewed general management controls at the lottery and issues involving retailers. We also reviewed the distribution and use of lottery proceeds by several state agencies to ensure that funds in the education lottery account are spent in accordance with the law.

Lottery Operations
We found that overall the SCEL has instituted adequate management controls and has taken steps to limit administrative costs. In some areas, we have recommendations for improvements in lottery operations.

• The SCEL has made appropriate efforts to control administrative costs, which have been less than the 15% allowed by law. We identified two areas, cellular phones and vehicle use, where the lottery could further cut costs, resulting in more revenue for education. The SCEL could reduce the number of cellular phones provided to employees who have primarily administrative desk jobs in the main office. Also, the lottery could obtain additional savings from re-evaluating its use of vehicles.
• We reviewed the lottery’s management of its contracts, including its advertising and gaming contracts. Generally we found that the lottery has adequate controls. However, in one case, the South Carolina Law Enforcement Division (SLED) has provided services to the lottery without a written contract.
• The SCEL does not have a formal system of measuring results throughout the organization. The lottery measures its performance by meeting or exceeding its revenue goal. While revenue is a key indicator of the lottery’s performance, it is not the only area in the organization that should be monitored for results.
• We reviewed the S.C. Education Lottery Act and lottery operations to identify amendments to the statutes that could be beneficial to the state. We found that some of the restrictions on advertising could be changed to reduce costs and increase lottery sales. Also, the lottery is restricted from competitively procuring communication services. The use of a competitive procurement method helps to ensure that the providers selected are cost-effective and of high quality.
• Our review of retailer licensing files indicated that the SCEL has appropriate controls over the licensing process. We also noted that the lottery has experienced a low percentage of outstanding debt by retailers. However, the lottery should update its licensing policies and procedures regularly, and should implement a written policy on the use of the fidelity fund for uncollectible debts.
• We did not find problems in the area of retailer recruitment and retention. Evidence indicated that most retailer terminations were because the retailer was not making anticipated profits. The rate of compensation paid to lottery retailers in South Carolina (7%) is higher than average, ranking 7th out of 39 lotteries.
• The lottery has a good system of controls over prize payments; however, an independent review of policy compliance would strengthen these controls. Also, the General Assembly should consider lowering the threshold (currently $5,000) at which the lottery must withhold debts owed to the state.

• Generally, lottery proceeds have been used as required by law. However, in some cases the General Assembly released agencies from the statutory requirements due to the state’s budget situation. The state’s school districts and South Carolina State University were allowed to use lottery funds for general operating purposes.
• We found that controls over the use of lottery funds are uneven and still being established. For example, lottery-funded scholarships are subject to a system of audits and controls that are already established. However, some agencies have not yet instituted appropriate controls. The State Auditor’s office is directed by the FY 03-04 appropriations act to ensure that agencies receiving lottery funds have appropriate controls.
• Some lottery funds have not been used in a timely manner. For example, using the first $1 million in unclaimed prize funds, the Budget and Control Board was required by state law to contract for services assisting in the prevention and treatment of gambling disorders. However, although funds have been available since November 2002, as of August 2003, these contracts had not yet been awarded.